Crowdfunding Real Estate

January 7, 2015

Since the phenomenon of crowdfunding began, scores of online sites and several different variations have evolved. The practice most often involves the use of social media to access networks of potential investors in the form of family, friends, colleagues and like-minded strangers. Sites such as Facebook, Twitter, and LinkedIn are where most crowdfunding activity begins. Other online locations are fundrise.com, realtymogul.com and crowdstreet. The goal is to spread the word about business plans or ideas and recruit investors. Crowdfunding has gained steam as a powerful vehicle for its ability to help raise funds beyond one’s usual circles.

Because the potential for raising capital for all sorts of pursuits is a distinct possibility, there are also different types of crowdfunding. There is reward based funding that has been popular for raising capital for film, music and art projects. There is also philanthropic crowdfunding that most often focuses on worthy causes and individuals in financial need. Now, another type is enabling a new wave of investors to get into the world of high stakes real estate.

Equity crowdfunding is when the “crowd” chooses an unlisted company, that is, one that is not on the stock market, and invests in it in exchange for shares in the company. This approach is becoming an attractive way for individuals to get into the REIT game. For the uninitiated, an REIT is a “real estate investment trust” which is, in essence, a company or collective that owns and operates an income producing piece of real estate. Examples of REITs are apartment complexes, vacation rentals, and retirement communities. They may also be retail centers, warehouses, hospitals, hotels, and even farm and timber operations.

Crowdfunding real estate has gained the attention of investors who have recognized the low-risk, high cash-flow potential of the U.S. real estate market. Equity crowdfunding has really only been an option since 2012 when the JOBS Act was legalized by Congress. That action made it legal for accredited investors with a net worth of $1 million, excluding their primary residence, and investors with an annual income of at least $200,000, to participate in this type of crowdfunding.

According to a spokesperson fro the Commercial Real Estate Development Association, “Crowdfunding for real estate is not an entirely new phenomenon. Numerous players have entered the field. Although each of these platforms has its own niche and strategy, with different levels of minimum investment, all are geared toward accredited investors who meet specific requirements for net worth and/or annual income. By contrast, crowdfunding under the JOBS Act will open the field to many more smaller investors.”

Perhaps you have gotten wind of this trend and would like to learn more? Representatives from the Commercial Real Estate Development Association have examined the pros and cons of ventures of this type. They acknowledge that that are risks involved. However, given the right set of circumstances and a favorable market, becoming involved in a crowdfunded real estate buy can be quite lucrative! Based on the CREDA’a review, here is a look at the pros and cons.

The Pros:

  • Crowdfunding a piece of real estate allows investors with smaller budgets to access the action
  • The “crowd” is not a silent partner, but instead has the opportunity to work directly with the real estate developers
  • Investors can shop around online for projects to become involved with that suit their sensibilities and budget

The Cons:

  • The “crowd” may share strength in the power of numbers, however, they can not control the ups and downs of the market
  • A major risk crowdfunding investors need to realize is that for whatever reason(s), the developers may default on the deal
  • This type of purchase lacks liquidity which hampers the rate at which the ”crowd” can sell out and move on

Before diving in headfirst and bringing a large chunk of change with you, those in the know advise to proceed with caution. In other words, do not be drawn in by a cleverly designed website or social media campaign. Do your homework, speak with other current or past investors and thoroughly investigate the crowdfunding company. Here is some sound advice from Darren Powderly, who is the co-founder of CrowdStreet.com: “From the investor’s perspective, one should take care to research the platforms on which they are searching for investment opportunities. Not all platforms are created equal, and multiple business plans are being tested in order to capitalize on this emerging trend.”

Powderly so much as suggests that prospective “crowd” members dig deep and gather all the information they possible can regarding the reputation of the individuals in charge of the venture. He also stresses that transparency is something to always look for. Everything should be out in the open and websites should include education pages that explain the entire process and the risks involved. Lines of communication should be open and crystal clear so the newbie investors understand exactly how all aspects of such a purchase works.

Related Topics…

  • What to look for when comparing investment properties
  • The Social Benefits of Homeownership

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